From Marx to Picketty: The Future of Capitalism

The future of capitalism has been a topic of great interest to both its supporters and its critics. Probably the most important critic of the capitalist mode of production was Karl Marx, the great thinker and revolutionary of the 19th century. For Marx capitalism as a mode of production was a double edged weapon; it represented advancement over feudalism since it led to a vast increase in the productive capacity of the economic system. But the dynamics of capitalist development contained within its structure the seeds of its own destruction. Savings and investments would increase under capitalism and the search for profit would encourage the development and application of new technology in production. But the search for profit was bound to lead to concentration of wealth and income among a few and pit capital and labor as adversaries in the final distribution of income. Ultimately the falling rate of profit in the face of continuous accumulation of capital would lead to decreasing share of labor in final output, increasing unemployment and destitution among the working population leading to revolution and the destruction of the system. It is a deterministic portrayal of history where human actors do not have much choice. In this narrative, Marx missed the emergence of “countervailing forces” in the society in the form of trade unions struggling for rising wages, the expansion of the suffrage, the rise of a property owning middle class and the impact of all these changes on the distribution of political power and policy making in the government. However, in later years, the “mature” Marx seems to move away from pure reductionism while indicating the possibility of socialism through less violent means. Irrespective of this confusion, Marx gave us a grand and a powerful narrative providing a compelling fascination of a post capitalist future that was supposed to be characterized by compassion, justice and freedom.

What economic, political and social system replaces capitalism after it is overthrown in the “dustbin of history”? If socialism was to be the new social formation where the widening chasm between the rich and the poor will give way to a socio economic structure that would be just and humane what would then be its constitutive elements? On this point Marx was more like a mystic than a theoretician. The outline of his new economic and political system was remarkably vague and it was left to his followers to define it in action.

Types of Socialism
In practice, Marx’s vision of socialism and the new politico- economic structure was based on three important elements. First, the economy after the fall of the capitalist system will be and managed by the state. Second, Individual property rights will be abolished and the state will be the sole employer and investor . Third, in order to carry out the first two steps the party of the proletariat , the communist party, will exercise state power based on a system of ” democratic centralism” in the name of the people.

The application of Marxist doctrine in practice was a contentious issue right from the beginning. The hard line socialists believed that under the leadership of the communist party the first two steps of practical socialism – the ownership of the means of production by the state and the total abolition of private property – should be the corner stone of the new society. The soft line socialists supported the vision of socialism as a new mode of production that would eliminate yawning inequality of income and the excesses of capitalism but they argued that it could be achieved within a framework of political competition with some space for the common people to own the means of production under the guidance and partnership with the state. In effect they were arguing for a realignment of social forces under a competitive party system. Both these experiments in the application of the Marxist vision were tried in different countries in the 20th century.

In much of the 20th century the Soviet Union tried the hard line approach to socialism and a one party system based on “democratic centralism”. After seventy years the experiment failed, not because of outside aggression but because the political and economic system could not improve the productivity of the economy and sustain the support of the people once the initial growth momentum led by forced savings and the transfer of rural labor to urban areas for industrialization was exhausted. Ultimately it collapsed from its own internal contradictions between the ruling elite and increasingly urbanized and literate middle class.

Soft line socialism has also two distinct models in practice. The first is the one party based Chinese socialism. After the failure of Maoist vision to create a “new man” China changed track. Under the leadership of Deng gradual loosening of state ownership of the means of production and ceding more space to private sector based on capitalist ethos and values has continued to gain momentum and with it an impressive transformation of the economy. Capitalism and market economy under one party leadership is a new model of soft line socialism claiming to take its inspiration from Marxism. It is now the basis of a new economic model often known as the “Beijing Consensus”.

The second soft line socialism model rejects one party led political system. It argues that the objectives of eliminating capitalist exploitation can be achieved within a political system that is based on competitive politics and a balance between the state and the private sector in the production and distribution of income and output. This is reflected in the assessment and judgement of the political parties on questions of economic growth, income distribution and social welfare. The Marxian focus on the interest of the proletariat is used to provide the philosophical basis, albit in an indirect manner, to justify competitive party politics and a market economy. The emphasis is not on state ownership but on individual initiative and entrepreneurship that is expected to add new value and generate new sources of profit so that the rate of return on capital does not decrease as in the Marxian scenario of confrontation between capital and labor.

The two models of soft line socialism are increasingly converging in the design of institutions for production and distribution of output and income. However what distinguishes them is the political route they have chosen to achieve these objectives. While the first model invariably aims to reap the gains of capitalist dynamism within a one party model of accumulation, expansion and distribution of political power the second model relies on multiparty politics to achieve the same. The differences in the design of the institutions to exercise political power has led to divergences in their respective views on the relationship between state and society.. Nevertheless the norms and values defining new economic institutions show a great degree of similarity and the possibility convergence in the future.

In both hard and soft line socialism there are four elements that have been of constant concern. They are: accumulation of capital, rate of return on capital, income and wealth distribution and the institutionalization of innovation for increase in the productivity of labor.

The rate of return of capital over time depends not just on the quantum of capital as Marx visualized but also on technological innovation as a factor of production. The inability to appreciate this logic and design a market structure that makes innovation a necessity for survival was one of the important reasons for the demise of the hard line socialism in the Soviet Union at the end of the 20th century. On the issue of income distribution and providing the basic necessity of life to its citizens hard line socialism in the Soviet Union, despite disasters at the initial stage, was to an extent responsive to the demands of economic justice . Still, the tendency of the political elite to corner the privileges of the economy for a selected few – the new political class – while neglecting the economic ambition of the rising middle class proved politically explosive.

The failure of the economic and political system of the Soviet Union reflected the empirical failure of Marxism. However, the search for an alternative model still drawing its inspiration from class struggle and one party rule continues even today. In this scenario China’s economy that has been able to achieve high rates of growth for over three decades is emerging as a possible alternative model; there has been some interest on the so called Beijing Consensus as an alternative to the the famous Washington Consensus first adopted by international financial institutions. Both models however have not been able to have a firm grip over increasing income and wealth inequality in the society. Experience so far indicates that capitalism is a robust engine of economic growth and wealth accumulation but its tendency to pit capital and labor against each other remains a problem that will demand new ideas in the future.

The Keynesian Solution
Apart from Marx one the greatest economist of the 20th century was Keynes. He wanted to manage the deficiencies of the capitalist system while putting in good use its strength for economic prosperity and well being of the people. Keynes developed the theoretical model to manage the capitalist system primarily through demand management so that economic depression characterized by significant decrease in income, output and employment could be avoided while retaining the advantages of the competition, technological innovation and the functioning of the market economy. He proposed monetary and fiscal tools for the central bank and the central government to control the business cycle so that the scenario visualized by Marx could be avoided. The antagonistic struggle between capital and labor as projected in the Marxian determinism was in Keyensian framework not an inevitability but a warning for reforming the system so that its benefits could be harnessed while taking appropriate steps to keep its centrifugal tendencies under control. Marxian analysis ended with the logic that ultimately it is not possible to save capitalism from the capitalist and this is where we read the famous logic of capitalist becoming the “grave diggers” of capitalism.
Keynes like Marx was aware of the dynamism of capitalism. Unlike Marx he provided the theoretical framework to turn capitalism into a new force not for grave digging but for building a new era of prosperity and well being for the people. This process was not going to be smooth. People’s economic behavior is also guided by a sense of uncertainty, speculative activity and “animal spirit” so that full employment equilibrium is almost like a hide and seek game that policy makers will have to be aware of. Alternatively, under employment equilibrium can be a feature of capitalism and the state must be there for correction with an increase in aggregate demand so that profit and income will increase alng with a rise in employment.
Schumpeter and Creative Destruction

From Keynes we come to Joseph Schumpeter one of the great thinkers of the 20th century. Schumpeter was courageous enough to speculate on the future of capitalism. He came up with the idea that the dynamics of capitalism was rooted in its built in mechanism of “creative destruction”. The capitalist market place required firms competing for profit and a greater market share to devote resources and managerial talent to generating new knowledge and technology and to cut cost while adding more value to the product. The drive towards efficiency and productivity led to a continuous flow of new products and design that virtually amounted to a “destruction” of the existing product. In this process Schumpeter saw the role of the entrepreneur as being crucial. The entrepreneur was the agent for creating the link between innovation and production and willing to take risk inherent in this process. Many would fail but those who succeeded would add new value to the society never dreamt before. The success of many start up business and their ability to generate enormous wealth in a span of few years shows that Schumpeterian focus on innovation and entrepreneurship was in the right direction. These days both developed and developing countries place high emphasis on entrepreneurship. It is taken as a matter of faith that the government should create an atmosphere that links imagination and innovation of budding entrepreneurs with the market so that there is ample opportunity for new business to flourish. However Schumpeter thought that the entrepreneurial spirit could not be sustained as enterprises grew bigger and transformed into large corporations staffed by a new class of professionals. It is these bureaucratic managers that would ultimately destroy the entrepreneurial spirit necessary for creative destruction . Schumpeter like Marx was not optimistic about the future of capitalism and thought that its success would ultimately be the cause of its failure. However, the route that Marx and Schumpeter used to reach at this conclusion are different. While Schumpeter saw the waning spirit of entrepreneurship in the late stage of capitalist development as a major weakness Marx invariably viewed the capitalist growth path as leading to a falling rate of profit and the intensification of class struggle because of rising unemployment in the economy.

Both Marxist vision of revolutionary overthrow of capitalism and Schumpeterian pessimism of capitalist dynamism over the course of its evolution have to do with the rate of profit in the system. While Marx sees rising income inequality and the falling rate of profit as the culprit in the demise of capitalism Schumpeter views the lack of entrepreneurial spirit in the bureaucratically managed corporations as the fundamental weakness of the system.

Thomas Picketty and Capital

In the 21st century Thomas Picketty examines some of the assumptions of capitalist development and its impact on income distribution. Picketty’s thesis is based on the logic that when r (the rate of return on capital) is greater than g,( the growth rate of the economy) rising income inequality can plague the capitalist system leading to an increase in social polarization over time. In this scenario inherited wealth becomes crucial for a person’s prospect in the economic system. Those who have a higher capital base have a built in advantage in the economic system especially when r>g. For an emerging economy this may not be all that serious if the growth rate is high since it would imply that new opportunities for jobs and profit in different sectors of the economy. For mature capitalist economies with rising capital to income ratio concentration of capital within an increasingly small circle becomes the basis for increasing income inequality and sluggishness of the system. In fact the famous Kuntezian thesis that postulates a bell curve between income inequality and per capita income is empirically incorrect and the reverse seems to be true, implying that as economies become developed income and wealth inequality is going to be a problem. Therefore the idea that growth over time will automatically take care of income inequality is no longer true.
Picketty presents truely impressive empirical data to prove his point. He shows that income inequality was high in19th and early 20th century. But economic depression and the two World Wars led to decline in the capital- income ratio. However this trend was reversed in the last half of the 20th century especially after the focus on deregulation and liberalization gathered momentum in all the developed countries. The so called Washington Consensus has provided the intellectual basis for a new tolerance to rising economic inequality. There was now less focus on trade unionism, a renewed interest on less regulation and an willingness to experiment with new financial products whose risk characteristics are not properly understood. The link between real and financial capital was ignored and a rise in wealth concentration reaching the level of the early 20th century was seen as the” new normal”. This trend has been relatively more prominent in the USA. The rise in wealth accumulation among the top 10 percent in the USA has been remarkable. Even more notable has been the dramatic rise in the wealth status of the top 1 percent, who are now becoming the hyper wealthy in the economic system. This fact coupled with a rate of growth that is lower than the returns on capital has reinforced the rising level of economic inequality in the society.
No society can tolerate a persistent increase in economic inequality for a long period without serious social upheaval but the tolerance level varies between countries depending on societal norms as well as institutional ability to tap simmering discontent for change in public policies. In the emerging countries too the gap between the richest 10 percent and the rest continues to increase. However, since both growth rate and returns on capital continue to remain relatively high the persistence trend of inequality is glossed over because new jobs and new opportunities to make money are being created in different sectors of the economy for any one to think seriously about agitation against the government. This is evident in both China and India where high growth rate goes hand in hand with a high level of wealth and income inequality. For China where the legitimacy of the government is closely tied albit indirectly with high growth and new job opportunities inequality in the distribution of capital and income could emerge as a serious problem in the future. In India the nature of politics is different but it is no different when it comes to the question of high economic growth as well as a socially and institutionally acceptable level of equality in wealth and income distribution to consolidate the political legitimacy of the system.

The Shadow

Where will capitalism end up in the future? Between the Marxian grave digger hypothesis to Picketty concern of a society where the rate of return of capital is consistently higher than the growth rate of the economy and thus an increasing concentration of capital in the hands of a minority like in the 19th and the early 20th century, the future of capitalism remains unpredictable. As a social formation of political, economic and cultural values capitalism so far has lifted millions of people out of poverty and spurred technological innovation and increase in labor productivity under the theme of “creative destruction” unimaginable before. However, It has in its structure the seeds of economic instability that was vividly evident in the great depression in the 1920’s as well as the great recession of 2007. In the mean time managing capitalist tendency of disorder has also led to new thinking on economic management as outlined in the Keynesian theory of macro economics that focuses on the role of the state. But it has been challenged since the 1970’s and the emerging general consensus among economists has been that that the problems of business cycles as in the past were not longer a serious problem. This line of thinking led to the revival of neo classical economics and a neglect of the questions of income and wealth distribution. However, the great recession of 2007 has once again forced many to reconsider this logic and as Prof. Paul Krugman of Princeton University argues the “return of the depression economics” is now on the horizon. . In this context Picketty’s new focus on the rising capital- income ratio and a rate of return on capital that is higher than the growth rate of the economy has outlined the possibility of a new crisis in capitalism in the future. The need for a new role of the state that manages capitalism so that its dynamism is not lost while restraining its tendency to subvert socio-economic institutions and political decision making in favor of the rich and the powerful is going to be a serious challenge in the future. Picketty’s recommendation is an annual progressive tax on capital that would limit the concentration of wealth. This is not a recommendation that is likely to be accepted now but it sets the tone for debate in the future. In any case transforming capitalists from “grave diggers” of capitalism to dynamic builders of an innovative, efficient and prosperious society with an acceptable balance of economic and political power between different strata of population remains the task of the future. In fact, Picketty thinks that there is a possibility of “patrimonial capitalism” where rich family dynasties could control the core of the economic system of the future. Ultimately, while it is clear that many of the Marxist assumptions and conclusions are no longer relevant or valid capitalism will have to proceed cautiously with the shadow of Marx looming in the background.